Railroad's new owners reassure S.D.

Upgrades and continued service promised for east-west line

Jan. 6, 2014

Written by

Dennis Daugaard

Lucas Lentsch

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The sale of 660 miles of railroad from Tracy, Minn., to Rapid City comes with an assurance from the new owner that a fundamental shortcoming that plagued the past two owners won’t threaten vital rail service for South Dakota shippers.

The Canadian Pacific Railway is selling the line to Genesee & Wyoming Inc. of Darien, Conn., for about $210 million. The sale is expected to close within six months.

G&W operates short line and regional freight railroads in the U.S., Canada, Australia and Europe. The new South Dakota acquisition will be named the Rapid City, Pierre and Eastern Railroad. It will be shaped within the G&W model of strong local management, which makes G&W’s acquisition of disparate, unconnected rail systems successful, G&W spokesman Michael Williams said.

The Canadian Pacific bought the line as part of its acquisition of Cedar American Rail Holdings’ Dakota, Minnesota and Eastern and Iowa, Chicago and Eastern railroads for $1.48 billion. The sale was announced in 2007, and it received federal approval in 2008.

Not enough revenue for upkeep

The DM&E, IC&E consortium was the nation’s largest regional freight railroad, with annual revenue of $340 million at the time of the sale to the Canadian Pacific. But according to Kevin Schieffer, former chief executive officer of the DM&E, even at that size, it did not generate enough revenue to pay for more than $300 million in necessary infrastructure upgrades to track in South Dakota that was, in some cases, more than a century old. Without such improvements, the line gradually would fall apart, Schieffer said.

Schieffer had hoped to make the railroad large enough to pay for the facilities upgrades by expanding it to Wyoming’s Powder River Basin coalfields and hauling coal to Midwestern and Eastern utilities. But when he was unable to secure a federal loan for the project, he sold the line to the Canadian Pacific.

Promise not kept, governor complained

At the time of the purchase, Canadian Pacific agreed to make capital improvements to its newly acquired DM&E track. However, last year, Gov. Dennis Daugaard protested to the federal Surface Transportation Board that Canadian Pacific had not made good on its promise.

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At the announcement of the Canadian Pacific sale to G&W, Daugaard said, “I am hopeful this sale to a short line operator is in the best interest of the state. With the recent decision from the Surface Transportation Board, I am hopeful that our questions about the Canadian Pacific’s obligations to improve the line will be answered .... The line is too important to our state for our questions to go unanswered.”

G&W’s Williams points to national recognition the G&W received for railroad safety, and he said the company did its due diligence before purchasing the Canadian Pacific track across South Dakota to ensure it can operate its new railroad safely and efficiently.

“This due diligence included a physical inspection of the track and structures as well as the operations and customer base,” Williams said. “As the largest owner and operator of regional and short line railroads in North America, with a 115-year history, we have successfully completed multiple acquisitions similar to our proposed acquisition of the west end of the DM&E. We are excited about the opportunity that the RCP&E presents, and we look forward to working with all of the local communities, customers and other stakeholders to grow the existing business and bring our industry-leading safety program to the new operation.”

Hopeful reaction with S.D. shippers

Shippers are keeping their fingers crossed. Tom Kersting, CEO of South Dakota Soybean Processors in Volga, said the facility operates virtually 365 days a year, and on-time, reliable shipping is vital.

But Kersting also said he is hopeful the new RCP&E will offer a more favorable rate structure customized to the needs of individual clients, such as Soybean Processors.

“Class I railroads, like the Canadian Pacific, tend to have a one-size-fits-all rate structure,” he said.

South Dakota Secretary of Argiculture Lucas Lentsch hailed the sale of the South Dakota track to “a company that understands short line rail and managing those rails.” He also is hopeful G&W will see infrastructure investment will drive future growth.

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“It is vitally important to have a successfully operating line in our state,” he said.

Access to grain cars has been a problem in the past in South Dakota, and Williams said the G&W is well placed to deal with that.

“In addition to being very experienced with these issues around the country, we also plan to supplement the Class I grain car fleets with our own cars to further mitigate any concerns with equipment availability.”

Plans to maintain access to rail centers

On both the DM&E and Canadian Pacific, shippers had access to both the key rail center of Chicago and the Pacific port of Vancouver, Wash. Williams said such access will continue and expand, since the RCP&E has the ability to interchange with the Canadian Pacific, Union Pacific, BNSF and the Nebraska Northwestern Railroad.

The new RCP&E is expected to generate about $65 million in annual operating revenue.

Whatever G&W’s plans are for the new RCP&E, they won’t include expanding to Wyoming.

“CP has retained that right. It does not come with the sale, and we have no plans to do that,” Williams said.

The new railroad might look significantly different from its two predecessors. The Canadian Pacific maintained operations centers in Huron and Rapid City, and it operated across South Dakota with about 380 employees. The DM&E that preceded it not only had rail centers in Huron and Rapid City, it was headquartered in Sioux Falls and maintained about 125 jobs there that Canadian Pacific eliminated in 2010 and thereafter.

At its height, the DM&E had about 1,000 employees overall.

Williams said the RCP&E will have about 180 employees, with many of them coming from the Canadian Pacific’s pool of employees. Operations center sites have been discussed by company officials, he said, but no sites have been announced.